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Sourcing Strategies

The consistency ratio should be less than 0.1 for the subjective assessments to be considered consistent. A ratio greater than 0.1 suggests the assessments need to be re-evaluated.

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Azaz Ahmed
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36 views23 pages

Sourcing Strategies

The consistency ratio should be less than 0.1 for the subjective assessments to be considered consistent. A ratio greater than 0.1 suggests the assessments need to be re-evaluated.

Uploaded by

Azaz Ahmed
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as PDF, TXT or read online on Scribd
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Sourcing Strategies

Dr. Shakila Yasmin


Associate Professor
Institute of Business Administration
University of Dhaka
Sourcing Process

Supplier Design of Evaluation of


assessment supplier Design and Procurement supplier
and selection contracts collaboration performance

Third party sourcing increase supply chain surplus through aggregation in


terms of capacity, inventory, transportation costs and others. However,
reliance on third party may create dependency and increase risks. Hence,
proper due diligence is necessary.
Role of Sourcing in Supply Chain
◻ Overall purchasing outlay has increased from 40% to 70% of cost of
goods sold by manufacturers in general in one year
◻ US auto manufacturers have moved away from domestic suppliers to
remote suppliers as far as Japan
◻ Latin American Nations are Growing as Outsourcing Hot Spots

Unlike the past sourcing/purchasing decisions are no more a routine job


rather it has become strategic.
-Peter Kraljic
Sourcing Strategy

◻ Firm’s sourcing strategy should depend on two dimensions


Strategic importance of purchased item/service
■ Volume purchased
■ percentage of total purchased cost
■ Value added in the product line
■ impact on product quality, business growth and profitability
Complexity of Supply market
■ Availability/number of suppliers
■ make-or-buy opportunities
■ substitution opportunities
■ Pace of technology
Kraljic’s Supply Matrix
Kraljic’s Supply Matrix
◻ Top right quadrant:
Strategic items where supply risk and impact on profit are high
Highest impact on customer experience
Price is a large portion of the system cost
Typically have a single supplier
Focus on long-term partnerships with suppliers

◻ Bottom right quadrant


Items with high impact on profit
Low supply risk (leverage items)
Many suppliers
Small percentage of cost savings will have a large impact on bottom
line
Focus on cost reduction by competition between suppliers
Kraljic’s Supply Matrix
◻ Top left quadrant:
High supply risk but low profit impact items.
Bottleneck components
Do not contribute a large portion of the product cost
Suppliers have power position
Ensure continuous supply, buy in bulk
Focus on long-term contracts or by carrying stock (or both)

◻ Bottom left quadrant:


Non-critical items
Simplify and automate the procurement process as much as possible
Use a decentralized procurement policy
Operational Sourcing Issues
◻ Cost of material (as quoted by supplier)
◻ Supplier lead time
◻ Lead time variability of the supplier
◻ Minimum batch size
◻ Average demand and demand variability
◻ Inventory carrying cost
◻ Service level
◻ Quality of supplied material
Sourcing Exercise (no difference in quality)
Green Thumb, a manufacturer of lawn mowers and snow blowers, has historically
purchased a thousand bearings per week from a local supplier who charges $1.00 per
bearing. The purchasing manager has identified another potential source willing to
supply the bearings at $0.97 per bearing. Before making his decision, the purchasing
manager evaluates the performance of the two suppliers. The local supplier has an
average lead time of two weeks and has agreed to deliver the bearings in batches of
2,000. Based on past on-time performance, the purchasing manager estimates that
the lead time has a standard deviation of one week. The new source has an average
lead time of six weeks with a standard deviation of four weeks. The new source
requires a minimum batch size of 8,000 bearings. Which supplier should the
purchasing manager go with? Green Thumb has a holding cost of 25 percent. It
currently uses a continuous review policy for managing inventory and aims for a
cycle service level of 95 percent. Weekly demand has a mean of 1,000 and a
standard deviation of 300.
Multi Criteria Decision Making
Analytic Hierarchy Process

The Analytic Hierarchy Process (AHP), is a procedure designed to quantify


managerial judgments regarding relative importance of each of several
conflicting criteria used in the decision making process.
◻ It is popular and widely used method for multi-criteria decision making.
◻ Allows the use of qualitative, as well as quantitative criteria in evaluation.
◻ Wide range of applications exists:
Vendor Selection
Product Selection
Project Selection
AHP-General Idea

◻ Develop an hierarchy of decision criteria and define the


alternative courses of actions.
◻ AHP algorithm is basically composed of two steps:
1. Determine the relative weights of the decision criteria
2. Determine the relative rankings (priority) of alternatives
◻ Both qualitative and quantitative information can be compared
using informed judgments to derive weights and priorities.
Example: Vendor Selection

◻ A Procurement manager is choosing among three suppliers by


determining how well each supplier meets the following four objectives:
Efficiency
Power Factor
Turn ratio
Cost
Analytic Hierarchy Process
◻ Step 1: List the Overall Goal, Criteria, and Decision
Alternatives

◻ Step 2: Develop a Pair-wise Comparison Matrix


Rate the relative importance between each pair of decision criteria
and alternatives. The matrix lists the alternatives horizontally and
vertically and has the numerical ratings comparing the horizontal
(first) alternative with the vertical (second) alternative.
Ratings are given as follows:
. . . continued
Analytic Hierarchy Process
◻ Step 2: Pair-wise Comparison Matrix (continued)
Compared to the second alternative, the first Numerical
alternative is: rating
extremely preferred 9

very strongly preferred 7


strongly preferred 5
moderately preferred 3
equally preferred 1

Intermediate numeric ratings of 8, 6, 4, 2 can be assigned. A reciprocal rating (i.e. 1/9, 1/8, etc.) is assigned when
the second alternative is preferred to the first. The value of 1 is always assigned when comparing an alternative
with itself.
Example
◻ Suppose the manager has identified the following pair-wise comparison matrix for
the four objectives
Analytic Hierarchy Process

◻ Step 3: Develop a Normalized Matrix


Divide each number in a column of the pair-wise comparison matrix by its
column sum.
◻ Example:
Analytic Hierarchy Process
◻ Step 4: Develop the Priority Vector
Average each row of the normalized matrix. These row averages form the
weights for each of the objectives. The values in this vector sum to 1.
◻ Example:

Why does approximate the weight for objective 1 (Efficiency)?


Analytic Hierarchy Process
◻ Step 5: Determine the score of each alternative on each objective
Construct pair-wise comparison matrix for each objective
Construct a normalized matrix for the alternatives for each objective
Construct a vector of scores for the alternatives for each objective

◻ Example: Suppose the manager assesses the following pair-wise comparison matrix for the 3 suppliers for the
cost objective, then the normalized matrix and the vector scores for the three suppliers on cost are given as
follows:
Analytic Hierarchy Process
◻ Step 6: Determine the best alternative
Combine the scores of the alternatives with the weights of the objective to determine the
best alternative
◻ Example: Suppose the vector scores of the jobs for the objectives are as follows:

The manager
should select
supplier 2
Analytic Hierarchy Process
◻ Step 7: Check for Consistency
The consistency of the subjective input in the pair-wise comparison matrix can be
measured by calculating a consistency ratio. A consistency ratio of less than .1 is
good. For ratios which are greater than .1, the subjective input should be
re-evaluated.
Determining the Consistency Ratio

◻ Step 1:
For each row of the pair-wise comparison matrix, determine a weighted sum of the
entries and the vector of weights.
◻ Example: Checking consistency of the A matrix
Compute Aw:
Determining the Consistency Ratio
◻ Step 2:
Find the ratio of each element of the weighted matrix to the corresponding weights
in the vector of weights and average these ratios

◻ Step 3:
Compute the consistency index (CI) as:
CI=[(Step 2 result)-n]/(n-1), n=# objectives
Determining the Consistency Ratio
◻ Step 4: Determine the random index, RI, as follows:
n RI
2 0
3 0.58 • The values of RI give the average value of CI if the entries
4 0.9
in A were chosen at random
5 1.12
6 1.24
7 1.32
8 1.41
9 1.45
10 1.51

◻ Step 5: Compute the consistency ratio: CR = CI/RI

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